Jack has a house on a hill with a lovely view of the ocean H

Jack has a house on a hill with a lovely view of the ocean. His value of said view is $12,000. Meg is a property developer who wants to build a four-story apartment building right across the street from Jack’s house, which would block his view. Her profit from building the apartment will be $10,000.

a. Is the apartment efficient? (Assume that nobody besides Jack and Meg is affected.)

b. If there are no barriers to negotiation and Meg cannot build the apartment without getting Jack’s permission, will it be built? Why?

c. If Meg is allowed to build the apartment building without Jack’s permission, will it be built? Why?

Solution

a. No. Buiding an apartment by Meg would cause a negative externality to Jack. Jack who values the view higher than the profit earned by the builder, building an apartment would not be efficient, as it is causing more loss than the benefits or the profits.

b. if there are no barriers to negotiations, then both would negotiate. In order to get permission from Jack, he must be compensated by Meg for the would be the loss of the view block. To convince or to get permission from Jack, Meg must thus pay him at least $12,000, which he would not pay of course as the potential benefits from building the apartment would be less than $12,000. So, Jack would not permit Meg without getting compensated thus the aprtment would not be built.

c. If Meg can build the apartment without Jack\'s permission, then he would build the apartment. The only case when he would not build the apartment would be when Jack would agree to pay Meg more than his expected profits from the apartment building or a value higher than $10,000. The maximum higher would be $12,000.